Federal Tax Proposal Not Perfect, but Good for Michigan, Nation

Reform plans are on the right track

“Law and sausage,” German aristocrat Otto von Bismarck was reputed to say, “are two things you do not want to see being made.” Today’s sausage making in Washington, D.C., involves the final release of tax reform specifics that — if adopted — will mark the most comprehensive federal tax reform legislation since 1986.

The proposed legislation would reduce the number of federal income tax brackets from seven tax brackets to four.

There was originally talk about reducing the number of brackets to just three, flattening and reducing the tax code and its related burden even further. That did not pan out. The highest rate, currently 39.6 percent, would remain in effect with the plan introduced today, but the income level at which it would kick in would be raised.

The other new rates would be 12 percent, 25 percent and 35 percent, depending on a taxpayer’s income level. The current 10 percent rate goes to zero while the current 15 percent bracket gets rolled back to 12 percent.

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The plan would nearly double the standard deduction to $12,000 for singles and $24,000 for families while eliminating the personal exemption.

Most people may see more relief from this change than changes in the tax rates. They would also find completing their tax forms an easier task. Taking the standard deduction makes itemizing a moot point and the net effect may be a lower tax bite and less paperwork. According to Americans for Tax Reform and the Internal Revenue Service, 3.4 million Michigan citizens took the standard deduction on their 2015 taxes.

The National Taxpayers Union estimates that Americans spend 1.9 billion hours on just their 1040 tax forms in 2016, with individual and corporate tax compliance costs running to some $234 billion. By eliminating the need to itemize deductions, the plan would free up millions if not hundreds of millions of hours annually for more productive, not to mention more enjoyable, uses.

The corporate rate at which income is taxed would drop from 35 percent to 20 percent.

The United States operates the highest corporate tax rate among the 35 wealthy industrialized nations that make up the Organization for Economic Cooperation and Development, according to the Washington, D.C.-based Tax Foundation. Dropping the rate should help American companies compete better globally and — as a bonus — see them return some of their international profits to the United States for reinvestment.

The deductibility of state and local taxes sales and income taxes would be repealed.

This simplifies the code but it does something more important. It ends special and beneficial tax treatment to states which choose to tax themselves highly. Currently nearly 30 percent of the value of this deduction accrues to just two states — New York and California.

There are costs and benefits to adopting this plan and it will surely undergo a fiery debate, complete with lots of class warfare rhetoric. There is no reason to retain the highest personal income tax rate of 39.6 percent. The new plan should have at most three rates, not four. There are other problems with the plan, too, but on balance, there are very sound reasons for the United States Congress to adopt these reforms or even better versions of them.

The money Washington takes from us doesn’t belong to some unprotected class of government employees, it belongs to those who earn it in the first place. This proposal will allow more people to keep more of what they make. It makes the lives of taxpayers simpler at the personal and corporate level and dramatically reduces the overall cost — in time and treasure — of pleasing our federal tax collectors. It should also ignite vital economic growth in the country.

Grover Norquist, head of Americans for Tax Reform said today that “This is an amazingly pro-growth set of policies. Where we were told you could never see 3 percent growth again by the people who brought us 2 percent growth over the last 8 years — we are already at 3 percent — this take us up to 4 percent. This is a very strong, pro-growth, job-creating package.” Grover’s right to be optimistic and American taxpayers should be too.

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